When you need additional equipment for your business there are numerous financing options out there. From loans to leases the options can sometimes seem overwhelming.
Leasing may be an option you are interested in exploring but don’t know much about. There are several lease options you can choose from, including capital leases or finance leases and true leases or tax leases.
You can lease new or used equipment. You can even sell equipment that you have and lease it back. All of the various lease types, while different, have a couple of things in common - they usually will allow you to get a piece of equipment with little money down and with a lower payment than a traditional loan.
1. Improve Your Cash Flow
Leasing can improve your company’s cash flow by providing lower payments than a traditional loan for the same equipment. Most leases have a lower payment is because the lessor has assumed a residual value in the equipment. So you are only paying back a portion of the value of the equipment - the portion you are using.
Also, leasing companies will oftentimes provide seasonal payment plans, so you can have some payment relief during the slow season or seasons. Generally, equipment leases provide much greater flexibility around your ability to make payments than traditional financing.
2. Keep Your Equipment Modern
New equipment offers lower maintenance costs and usually warranties that protect against large unexpected repairs, giving you the benefit of less downtime for repairs and reduced maintenance costs. New equipment also makes it easier to attract top quality employees that are looking to work with the best equipment, making hiring easier.
To keep your fleet modern and cost efficient; you might want to look at a comprehensive leasing program that provides for lease expiration at or near warranty expiration. Having a modern efficient fleet could very well be more cost effective in the long run.
3. Generate Cash
Leasing doesn’t just help you acquire new equipment or equipment that is new to your business. It can also help you raise working capital or money to buy additional equipment.
A sale and leaseback transaction is one where a leasing company buys your existing equipment and leases it back to you. You get the cash that is locked up in your equipment and you still continue to use the equipment as if you owned it.
Most sale and leasebacks look a lot like a lease for new equipment. They are typically three to seven years in length and the terms look the same as if you had acquired new equipment. It’s just your equipment providing you with much needed cash.
4. Refinance Your Existing Debt
Another option to improve your monthly debt payments and, in some cases, generate cash is to refinance debt that is secured by your equipment. Refinancing with a capital or finance lease can lower your monthly payments by as much 50%.
The leasing company essentially stretches out your payments in order to reduce your monthly cost. This requires detailed knowledge of your equipment and its value over time. Generally banks will only finance new equipment and for relatively short terms. A leasing company’s knowledge of your equipment allows them to more closely match the term of your lease to the life of your equipment - all resulting in a lower monthly payment for your business.
Understanding The Fine Print
Lease contracts are usually “hell or high water” obligations to pay rentals. This simply means that the lessee has signed up to make the payments and they cannot get out of the lease if the equipment breaks.
If you decide you no longer need the equipment, the lease can be terminated, and most leases will contain a Termination Value Schedule which spells out the amount that will need to be paid in order to terminate the lease. These leases are also called “net leases,” which means the lessee agrees to pay all taxes, insurance premiums, maintenance costs and any other expenses that would be associated with owning the equipment.
Warranties associated with the equipment are transferred to the lessee, and the lessee provides the appropriate insurance coverage for the equipment. So, while your lessor may own your equipment, you have to think of it as your equipment and be prepared to pay the same operating costs that you would have if your company retained ownership.
Understanding whether or not leasing works for your situation is relatively simple. Focus on your monthly payment and the payment structure that is being offered to you by the leasing company. Cash flow in business is one of the most important variables that you need to control. Nothing else matters if you cannot service your debt payments from your monthly cash flow. If a leasing company can offer you a payment plan that can be serviced by your company’s monthly cash flow, then it’s a transaction that probably makes sense.
You could very well be offered a traditional loan that is less expensive in total than the lease but the cash flows don’t work, which makes the total cost irrelevant. Since equipment lessors are willing to make residual assumptions in equipment, provide seasonal payment structures or in some cases even skip payments, you should be able to find a lease financing option that will help you to profitably acquire new equipment or turn your existing equipment into much needed cash.
If you are in the market for equipment or are looking to increase your cash flow leasing is one option to consider. Here are some tips to help you decide if will work for you.
- Get a flexible payment structure to fit your business needs – If your business has a slow season leasing companies can provide seasonal payment plans.
- Consider a comprehensive leasing program that provides for lease expiration at or near warranty expiration – This will allow you to keep your fleet modern and cost efficient.
- Use your existing equipment to generate cash – With a sale and leaseback a leasing company buys your existing equipment and leases it back to you. You get the cash that is locked up in your equipment while still continuing to use it.
- Refinancing can lower your monthly equipment payments - Refinancing your existing equipment with a capital or finance lease can lower payments by as much 50%.
- Understand the fine print - Most leases contain a Termination Value Schedule, detailing the amount that will need to be paid to terminate the lease if you no longer need the equipment.
- Focus on your monthly payment and the payment structure - Nothing else matters if your payments are too high and you cannot cover your bills with your monthly cash flow.
For a complete, interactive version of this article, click here to download the Spring 2014 issue of Sustainable Construction.?